Magnitude of changes should not be underestimated

The magnitude of evolving insurance accounting changes should not be underestimated.

The International Accounting Standards Board (IASB) has deferred the effective date of IFRS 17 (an International Financial Reporting Standard) to financial years commencing on or after 1 January 2023. Even with the extra time allowed, there is much that needs to be done.

IFRS 17 and its purpose

“IFRS 17 represents a complete overhaul of accounting for insurance contracts. The new standard, which replaces the current IFRS 4 standard, aims to address the transparency of insurers’ financial positions and performance. It is intended to make the financial statements more comparable across insurers and other industries,” said Jac Niemand, who heads up Momentum Metropolitan’s implementation efforts. 

“The IASB had always intended to replace IFRS 4; the differences in accounting treatment across jurisdictions and practices have made it difficult for investors and analysts to understand and compare insurers’ results. Most stakeholders agreed on the need for a common global insurance accounting standard, but there was less agreement on what this needed to look like. This explains why the standard took almost 20 years to develop,” emphasised Niemand. 

“The effective date for implementation of the standard was deferred to 1 January 2023. As comparative period information needs to be supplied, it means that the first balance sheet on an IFRS 17 basis would need to be prepared for 31 December 2021 (for companies with a December year-end),” added Niemand. 

“In the main, IFRS 17 will overhaul the income statement to reflect revenue on a modelled basis (reflecting the provision of insurance services) instead of receipts (reflecting the timing of premiums). This necessitates an income statement closely aligned with the projected cash flows under an insurance contract, mainly residing in actuarial models,” continued Niemand. 

The IFRS 17 journey

“Large insurers have been part of the IFRS 17 journey to varying degrees over the past 20 years, but most only initiated programmes around the time that the standard was published in May 2017. A final revision was published in June 2020,” said Niemand. 

“The implementation journey has been challenging with a number of moving targets. The standard affects insurers in different ways – long-term insurers’ implementation and transition efforts are significantly heavier than those of short term insurers,” he said. 

Momentum Metropolitan have a range of insurance operations in the group and despite some challenges we are confident that we will complete implementation efforts across the group in time. The group’s first financial statements (interim statements) prepared on a basis which includes IFRS 17 will be published for the six months ending December 2023. 

There were challenges for insurers

There were three main challenges for SA insurers, according to Niemand, these were: 

• People - Experienced financial reporting resources in the form of technical accountants with insurance reporting experience and actuaries in financial reporting areas. This is exacerbated by the very same resources also being in demand globally.
• Auditor alignment - Despite the standard having been in development for almost 20 years, there were quite a number of interpretations which only settled a while after the publication of the standard in May 2017 (including the revision needed in June 2020). In addition to this moving target, insurers had to ensure that their respective auditors were on board with their approaches.
• Localisation - IFRS 17 is a global standard, and we have no mechanism in SA to tailor global standards for use in SA (different to say Europe). This means that we have to make the standard work for products and fact sets which have a South African flavour, while complying with the exact wording of a standard intended for much wider global application. 

In time, two more challenges emerged: 

• In some instances, COVID-19 resulted in some finance resources being diverted to address the more immediate needs of quantifying the impact of the pandemic on the business. This was over and above the more obvious challenges of adapting to a remote working environment while managing a project across a number of finance and actuarial teams.
• Explaining how insurance profitability and experience will reflect in the revised disclosures to different stakeholders, given the extensive changes to the income statement. Even though this is arguably a challenge which existed from the outset, we have a relatively small insurance analyst community in SA. The challenge also manifests itself in discussions around an approach to materiality – where we need to look at a more nuanced approach than merely testing line items. 

What is the solution to this? 

“There is no single approach to success here. Insurers tackled these challenges in a variety of ways. Our approach has been to leverage as much as possible off existing processes and infrastructure and only build marginal capabilities where required (as opposed to a full-scale re-design). We believe that this minimised the implementation risk of the project,” he added. 

“In addition, we started off with a focus on financial modelling aspects which then expanded into data requirements (as source) and ultimate reporting (as target),” continued Niemand. 

“The most important aspect was to have the right people dedicated to the solution. By ensuring that an expert group can maintain energy and sustained focus on what is required, we have produced output in line with much more extensive programmes. In addition, this ensures that the people that are the closest to existing processes and systems have a significant role in IFRS 17 developments and that knowledge transfer happens as we progress,” he concluded. 

Writer’s thoughts:
The magnitude of evolving insurance accounting changes should not be underestimated. With a complete overhaul of accounting for insurance contracts, this may create a significant challenge for existing systems and processes. Even with the extra time allowed, there is much that needs to be done in what is still a relatively short time. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za